Model for financing road projects under the Public Private Partnership

Model for financing road projects under the Public Private Partnership

Traditionally, financing for development of National Highways in India was from the budgetary resources of the Government of India. In order to augment the available resources, loans have also been raised from multilateral  agencies  like  World  Bank,  Asian Development  Bank  (ADB)  and  Japan  Bank  of International Cooperation (JBIC). NHAI has earlier received loans directly from multilateral agencies (highway project). These loans are expected to be repaid through the toll income from the project.  The interest rate for the project is determined according to ADB's pool based variable lending rate system for US dollar loans. Around 80 per cent of the external assistance is provided to NHAI as a grant by the Central government. The balance is made available as long-term loans to NHAI, with the Centre bearing the foreign exchange risk. Such loans are usually provided for 15-25 years with a moratorium of 5 years.

Presently, the development and maintenance of National Highways is financed by following modes:

•   Government's general budgetary sources
•  Dedicated accruals under the Central Road Fund (by levy of cess on fuel)
• Lending by international institutions:

·         World Bank

·         ADB

·         JBIC

Private financing under PPP frameworks

• Build  Operate  and  Transfer/Design  Build Finance  Operate  and  Transfer   (DBFOT) Investment by private firm and return through levy and retention of user fee
• Build Operate    and Transfer  (Annuity)  - BOT (Annuity  )  -  Investment  by  private  firm  and return  through  semi-annual  payments  from NHAI as per bid.
• Special  Purpose Vehicle  –  SPV  (with  equity participation by  NHAI)
• Market Borrowings

NHAI also has a provision for providing grant up to 40% of  the  project  cost  to make  projects  commercially viable. However, the quantum of grant is decided on a case to case basis and typically constitutes the bid parameter in BOT projects generally not viable based on toll  revenues  alone. The disbursement of such grant is subject to provisions of the project concession agreements  (please  refer  CD  for provisions  in  the Model Concession Agreement).

Public Private Partnerships (PPP) are going to be the main mode of delivery for future phases of NHDP. While there are a number of forms of PPP, the common forms that are popular in India and have been used for development of National Highways are:

• ·         Build, Operate and Transfer (Toll)  Model Private developers/ operators, who  invest  in  toll able highway projects, are entitled to collect and retain toll revenues  for  the  tenure  of  the  project  concession period.
• ·         Build, Operate and Transfer (Annuity) Model The concessionaire bids  for annuity payments  from NHAI  that  would  cover  his  cost  (construction, operations and maintenance) and an expected return on  the  investment.
• ·         Special  Purpose  Vehicle  (SPV)  for  Port Connectivity Projects
• ·         Model Concession Agreement (MCA) has been developed to facilitate speedy award of contracts. This framework has been successfully used for award of BOT concessions.
• ·         Operate, Maintain and Transfer (OMT) Concession. Under the concession private operators would be eligible to collect tolls on these stretches for maintaining highways and providing essential services.
• ·         Special Purpose Vehicles   (SPVs) wherein NHAI contributes up to 30% of the project cost as equity. The SPVs also raise loans for financing the projects. SPVs are authorized to collect user fee  on  the  developed  stretches  to  cover repayment  of  debts  and  for  meeting  the  costs  of operations and maintenance.

General procedure  for  selection  of  concessionaires adopted  by  NHAI  is  a  two-stage  bidding  process. Projects are awarded as per the model documents- Request for Qualification (RFQ), Request for Proposal (RFP) and Concession Agreement - provided by the Ministry of  Finance. 

The opportunity for private players in the road sector can be broadly categorised in two segments of Infrastructure Development  Logistics and Services and Opportunities for Private Investors/ Developers

NHAI Risk/Obligations are Land Acquisition  Risk in NHAI  is  responsible  for acquiring the requisite land for the project highway and Approvals of NHAI  will  provide  all  reasonable support and assistance  to  the concessionaire  in procuring  applicable  permits  required  from  any Government Instrumentality.